Sustainable Economic Recovery Post COVID-19 in the GCC Region

15 Feb 2021 | Original

Member states of the Gulf Cooperation Council (GCC) are facing three different but interconnected shocks: the COVID-19 pandemic, a significant drop in oil prices, and climate change. First, COVID-19 has undercut economic growth and stability in the entire world as well as in GCC countries; the International Monetary Fund (IMF) projects a 7.3% economic contraction for oil exporters in the Middle East region,[1] and S&P Global expects GCC government debt to rise to USD 100 billion in 2020.[2] Second, oil prices have fallen from US$ 64 per barrel in 2019 to US$ 40 in early June 2020, which is alarming since this is well below the fiscal breakeven point for oil.[3] While GCC countries have been trying to diversify their economies, most of them are still heavily dependent on oil exports. More than 60% of Saudi Arabia, Bahrain, Oman, and Kuwait’s government revenues come from hydrocarbon. This figure drops to 54% for the UAE, and 38% for Qatar.[4]  Third, climate change could potentially render the MENA region uninhabitable by 2100 if no action is taken to decrease global carbon emissions.[5] By 2050, temperatures in the MENA region are expected to increase by 4°C, and could reach as high as 50°C during daytime by 2100.[6] Mitribah, Kuwait has already registered temperatures of 54°C in 2016, and Sweihan, Abu Dhabi has reached 50.4°C in 2017.[7] Moreover, by 2050, the climate impact on water resources in MENA is expected to invoke losses up to 14% of GDP.[8]

Sometimes the world needs a crisis, and this certainly does apply to GCC countries. While these governments have largely focused on public health amid the pandemic, priorities are being gradually redirected to long-term economic recovery. GCC countries have announced economic stimulus packages totaling US$ 97 billion, however, investment in green economic recovery and innovation is crucial to building back their countries better. Unfortunately, and according to Bloomberg, out of the total US$ 12 trillion global stimulus packages, less than 0.2% has been allocated towards climate concerns.

Shaping a Green Recovery for GCC Countries:

  1. Investing in clean hydrocarbon energy. Green stimulus packages build resilience against the threat of climate change but also deliver more jobs and higher and equitable growth. A report by the International Renewable Energy Agency (IRENA) estimates economic returns in renewable energy at US$ 3-8 for every US$ 1 invested, in addition to quadrupling the number of jobs in the sector over the coming three decades. It also projects an additional US$ 100 trillion to be added to global GDP by 2050 if investment in this sector is accelerated.[9]
  2. Building greener infrastructure. GCC countries will also need to invest in innovative technologies for greener cities such as seawater desalination projects, green buildings, and clean mobility, as well as developing and greening public transportation systems.
  3. Investing in the blue economy. The MENA region is considered the world’s most water-scarce region holding around 1% of the Earth’s total renewable freshwater resources.[10] Additionally, the Indian Ocean is one of the world’s busiest trade routes and accounts for the passage of 80% of the world’s maritime oil trade. GCC countries will need to invest in in developing a sustainable maritime industry and ensure the sustainable use of marine ecosystems.[11]
  4. Enforcing environmental, social, and governance (ESG) disclosure. Governments and regulators will need to improve the measurement, assessment, and disclosure of companies’ ESG performance. The financial returns on ESG practices and guidelines are economically sound; a performance analysis, conducted by Morgan Stanley, of more than 10,000 mutual funds, has showed that sustainability funds met or exceeded median returns of traditional funds 64% of the time.[12]
  5. Building a real data economy. Any true reform to transform GCC countries into more resilient, greener, and growing economies will need to start with data. It may be worthwhile to follow the EU’s example. The new Recovery and Resilience Facility of EUR 560 billion by the Next Generation EU offers financial support for digital and green reforms and has prioritized the building of a real data economy. This entails compiling data from the different key sectors and industries in all European countries to support the implementation of the European Green Deal.[13]

[1] Augustine, B. (2020). GCC to lose $270 billion in oil revenues in 2020, says IMF. Gulf News. https://gulfnews.com/business/gcc-to-lose-270-billion-in-oil-revenues-in-2020-says-imf-1.1594640168553

[2] Jones, M. (2020). Gulf government debt to see record $100 bn surge in 2020. Reuters. https://www.nasdaq.com/articles/gulf-government-debt-to-see-record-%24100-bln-surge-in-2020-sp-global-2020-07-20

[3] Kabbani, N. (2020). How GCC Countries Can Address Looming Fiscal Challenges. Brookings Institute. https://www.brookings.edu/opinions/how-gcc-countries-can-address-looming-fiscal-challenges/

[4] Kandil, M. and Mahmah, A. (2020). Economic Challenges for the GCC Countries after Covid-19. Economic Research Forum. https://theforum.erf.org.eg/2020/05/20/economic-challenges-gcc-countries-covid-19/

[5] Pal, J. and Eltahir, E. (2016). Future temperature in southeast Asia projected to exceed a threshold for human adaptability. Nature Climate Change. https://www.nature.com/articles/nclimate2833

[6] Hergersberg, P. (2016). Max Planck Gesellschaft. https://www.mpg.de/10856695/W004_Environment_climate_062-069.pdf

[7] Broom, D. (2019). How the Middle East is Suffering on the Front Lines of Climate Change. World Economic Forum. https://www.weforum.org/agenda/2019/04/middle-east-front-lines-climate-change-mena/

[8] World Bank. (2018). Beyond Scarcity : Water Security in the Middle East and North Africa. MENA Development Report;. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/27659

[9] Oxford Business Group. (2020). Can emerging  economies afford green recovery from Covid-19?. Oxford Business Group. https://oxfordbusinessgroup.com/news/can-emerging-economies-afford-green-recovery-covid-19

[10] Kandeel, A.(2019). Freshwater resources in the MENA region: risks and opportunities. Middle East Institute.https://www.mei.edu/publications/freshwater-resources-mena-region-risks-and-opportunities

[11] Ahmed, M. (2020). The blue economy- riding a wave of optimism? The National. https://www.thenational.ae/business/comment/the-blue-economy-riding-a-wave-of-optimism-1.1002524

[12] Morgan Stanley. (2015). The Business Case for Sustainable Investing. https://www.morganstanley.com/ideas/business-case-for-sustainable-investing

[13] European Commission. (2020). Europe’s Moment: Repair and Prepare for the Next Generation. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940

Building Resilience: Sustainable Financing in Emerging Markets

15 Jan 2021 | Original

The global response to COVID-19 bears witness to the power of collective action, and how technology can be mobilized to garner and streamline efforts across sectors, including health, education, telecommunication, and more. The pandemic has also exposed how vulnerable and fragile our economy can be; in a matter of months, hundreds of thousands of people died, millions of jobs were lost, and livelihoods shattered. Leading international organizations project global gross domestic product (GDP) growth for 2020 to range between -8.8% and 1%, and the number of those living in extreme poverty to increase by 420 million people.[1] In the wreckage left behind by the coronavirus pandemic, sustainable finance is all the more crucial in paving the way from devastation to recovery.

The next decade presents a ‘use it or lose it’ moment for emerging markets to reorient the financial sector towards building a more sustainable and resilient future. Investments in infrastructure are expected to reach US$90 trillion by 2030 to meet the needs of increased populations around the world, and COVID-19 has urged governments to provide large stimulus packages.[2] This places greater emphasis on the need to invest with a view of environmental, social and governance (ESG) issues, and not just traditional finance metrics. Indeed, for low and middle-income countries, returns on responsible investment is high, amounting to US$4 on every US$1 spent on resilient infrastructure.[3] Moreover, The Sustainability Report by Morgan Stanley analyzed the performance of more than 10,000 mutual funds to find that sustainable equity met or exceeded median returns of traditional equity 64% of the time.[4] This proves that there need not be a trade-off between financial and non-financial returns. In fact, ESG investments have a higher potential for long term payoffs. As the current pandemic forces a more prudent management of financial resources, sustainable investment options by governments, investors and corporations need to be prioritized.

Sustainable finance is not confined to environmental-linked investments, but extends to all financial products and services that integrate ESG criteria into its decision processes, policies, frameworks, and practice. It is about reducing the financial gap in meeting SDGs to solve major and global problems such poverty, inequalities, and climate change. Seven trends in sustainable finance will transform the future landscape of ESG in emerging markets:

  1. Increasing commitments to address climate change. In order for nations to prevent irreversible damage and stay at the current 1.5 degrees of global warming, global emissions must drop by 50% over the next decade.[5] A growing green bond market has emerged to help investors align their financial objectives with real economy impact, and to achieve the targets of the Paris Climate Agreement and Sustainable Development Goals. One example is the Real Economy Green Investment Opportunity GEM Bond fund (REGIO) created by HSBC Global Asset Management and leading Development Finance Institutions (DFIs). The fund has raised US$474 million and aims to aid investors in emerging economies to achieve the long-term SDGs.[6]
  2. Intensifying interest in the importance of ESG investment and disclosure. Making, assessing and managing investments based on ESG factors is gaining momentum worldwide. In 2018, 80% of the world’s largest corporations used Global Reporting Initiative (GRI) standards.[7] In 2020, the Dubai Financial Market(DFM) launched the UAE Index for Environment, Social and Governance (ESG) to encourage listed companies in the UAE to embrace ESG best practices.[8]
  3. Minding the gap through innovative financing. The financing gap to achieve sustainable development goals (SDGs) by 2030 is US$2.5 trillion annually.[9] The challenging landscape of sustainable financing in emerging markets has given space for innovative financing to develop. An example of this is the South African Impact Bond Innovation Fund, which is the first social impact bond focusing on early childhood in the Global South.[10] Another example is Majid Al Futtaim’s first Green Sukuk in the MENA region with a value of US$600 million.[11]
  4. Banks stepping up sustainability- and green-linked loans. Banks have been increasingly tying loan terms to ESG performance; sustainability-linked loans totaled US$71.3 billion in the first three quarters of 2019.[12]
  5. The quest for data. Sustainable investments require data based on ESG metrics. However, companies lack adequate and useful data to quantify and measure the impact of their investments, leading to potential inefficiencies. Early this year, Refinitiv launched the Future of Sustainable Data Alliance with the objective of accelerating capital inflows into sustainable finance by providing investors and governments the data needed to assess and identify sustainable investments and products.[13]
  6. The quest for taxonomies, regulations, and legislations. Regulations and legislations are considered key drivers to sustainable finance in emerging markets. Until 2018, sustainable financing was regulated in China only.[14] Increased attention has been given to establishing and standardizing regulations and guidelines that foster capital inflows to sustainable finance. Examples of measures taken by some emerging markets include Indonesia’s Green Finance Roadmap, the Banco Central Do Brasil’s voluntary requirements for banks to monitor environmental risks, and the UAE’s first set of guiding principles on sustainable financing.[15]
  7. Refocusing sustainable financing post COVID-19. The recent pandemic has shifted the nations’ focus to acute social risks such as health and employment. There is no doubt that economic recovery is a priority for all nations with sustainability and building resilience at its core. It is crucial to keep in mind that the comeback from COVID-19 will take years –the same years that are crucial to ensuring we meet our SDGs and climate change targets and prevent an irreversible catastrophe.

[1] UNIDO. 2020. Coronavirus: The Economic Impact. https://www.unido.org/stories/coronavirus-economic-impact-4-may-2020

[2] The Global Commission on the Economy and Climate. 2016. The Sustainable Infrastructure Imperative: Financing for Better Growth and Development. https://www.un.org/pga/71/wp-content/uploads/sites/40/2017/02/New-Climate-Economy-Report-2016-Executive-Summary.pdf

[3] Hallegatte, S., Rentschler, J. and Rozenberg, J.. 2019. Lifelines : The Resilient Infrastructure Opportunity. Sustainable Infrastructure. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/31805

[4] Morgan Stanley. 2015. The Business Case for Sustainable Investing. https://www.morganstanley.com/ideas/business-case-for-sustainable-investing

[5] UN Environment. 2019. Emission Gap 2019 Global Progress Report on Climate Change. https://www.unenvironment.org/interactive/emissions-gap-report/2019/

[6] HSBC. HSBC Real Economy Green Investment Opportunity Global Emerging Market.  . https://www.assetmanagement.hsbc.co.uk/en/institutional-investor/investment-expertise/fixed-income/regio

[7] Kell, G. 2018. The Remarkable Rise of ESG. Forbes. https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/#5c97a3f51695

[8] Khan, S. 22 April, 2020. “DFM Launches Index to Gauge UAE List Companies’ Commitment to ESG”. The National. https://www.thenational.ae/business/markets/dfm-launches-index-to-gauge-uae-listed-companies-commitment-to-esg-1.1009774

[9] Cooper, S. 05 February 2019. The Evolution of Sustainable Finance. https://www.sc.com/en/feature/the-evolution-of-sustainable-finance/

[10] ECD Impact Bond Innovation Fund. Innovation Edge. https://innovationedge.org.za/project/ecd-impact-bond-innovation-fund/

[11] Majid Al Futtaim. 15 May, 2019. “World’s 1st Benchmark Corporate Green Sukuk”.  https://www.majidalfuttaim.com/en/media-centre/press-releases/2019/05/majid-al-futtaim-lists-world-s-first-benchmark-corporate-green-sukuk–on-nasdaq-dubai

[12] Guzman, D. 21 October, 2019. Growth in Sustainability-linked loans boosts ESG rating firms. Reuters. https://www.reuters.com/article/growth-in-sustainability-linked-loans-bo/growth-in-sustainability-linked-loans-boosts-esg-ratings-firms-idUSL2N27615Y

[13] Evans, M. 29 January, 2020. New data alliance to drive sustainable finance. Better Society Network. https://bettersociety.net/future-data-sustanable-alliance.php

[14] Meskin, M. 04 Fenruary 2020. Give us regulation say MENA green leaders. https://www.globalcapital.com/article/b1k62slw8c0zz8/give-us-regulation-say-mena-green-leaders

[15] Berensmann, K. et al. 23 January, 2020. Fostering sustainable global growth green finance- what role for G20? G20 Insights. https://www.g20-insights.org/policy_briefs/fostering-sustainable-global-growth-green-finance-role-g20/

How partnerships help small businesses adapt to climate change– LSE

15 Sep 2020

Micro, small and medium enterprises (SMEs) in developing countries often face major barriers within their business environment to adapting to the impacts of climate change. These barriers include a lack of access to finance, markets, insurance, climate-smart inputs and services, and knowledge about adaptation options.

Many of these barriers can be overcome through the activities, products and services of other private sector actors. There has been a lot of interest in unlocking the resources of the private sector to plug gaps in adaptation finance, at national and international levels. There has, however, generally been limited clarity around how this can be achieved.

Multi-stakeholder partnerships are becoming an increasingly important development paradigm. NGOs hope that supporting private sector actors to develop adaptation goods or services, which they have an ongoing incentive to maintain, will produce longer-term resilience that extends beyond a given programme or project.

Through action and investment from donor-funded and public sectors – in areas such as research, data access, relationship development, business incubation and access to finance – multi-stakeholder partnerships are supporting private sector actors to deliver adaptation resources to small-scale producers.

Market-based partnership strategies envisage that multi-stakeholder partnerships will become self-sustaining. But, private sector provision of goods and services that aid adaptation among SMEs often breaks down following pilot projects, when donor funding and brokering activities are withdrawn.

Dependence on market mechanisms, specifically on low-risk and commercially-viable business opportunities, meanwhile, makes multi-stakeholder partnerships less likely to deliver adaptation support to the poorest, most vulnerable and most geographically remote groups.

To mobilise more inclusive partnerships, identify risks and prepare mitigation measures, sufficient investment from NGOs and other donor-funded development actors into partnership design and strategy at the early stages of developing a multi-stakeholder partnership is required. Yet market systems are dynamic and changing, requiring partners to continually re-evaluate and renegotiate the terms of a partnership. Multi-stakeholder partnerships are therefore likely to require longer-term monitoring, evaluation and assistance than is permissible in short-term development projects.

Building Back Better: Why Europe Must Lead A Global Green Recovery- Yale Environment

15 Jul 2020

As governments spend massively to revive economies, a huge battle has emerged around whether the economic recovery should also achieve other goals, particularly cutting the emissions that cause climate change. Those advocating green spending say the $10 trillion that governments have already committed to stimulus should be just the beginning, and an even bigger pile of cash is now needed for expansive “green new deals.”

In most countries, the political forces are blowing against green recovery. Distant, abstract goals like global warming have fallen far down the list of priorities. Some have actually relaxed pollution control standards. Unlike the last financial crisis, when nations spent up to 15 percent of their stimulus money on clean energy, few have such forward-looking plans this time.

Europe, however, is the exception. There, the European Green Deal — a $1.1 trillion climate-focused infrastructure and decarbonization plan that had been cooked up before the pandemic — looks set to get even bigger now. A hyper-green Europe will have little impact on the climate unless the better technology and business practices nurtured at home can spread widely to the places that cause most emissions. Only 9 percent of world emissions come from Europe, a share that has dropped steadily and will decline even faster the more Europe invests in weaning its economies off of fossil fuels.

Markets in Europe are already open to global competition, which will help make the whole world greener. For example, Europe has a highly competitive market for building renewable power. Open competition in these sectors of the energy system is essential because it produces bigger demand for clean energy, which means more robust international supply chains, faster global improvement in technology, and cheaper options for all countries.

Europe is also poised to show the world how to achieve a “just transition” — a concept built centrally into the European Green Deal and designed to look out for those, notably workers, hurt by technological transformation.

Gender, Climate, and Security (Report) – UN

15 May 2020

In many regions of the world, the impacts of climate change are exacerbating conditions that threaten peace and security. Rising temperatures, extended droughts, or heavier, harsher storms are resulting in loss of livelihoods, increasing competition over scarce resources and fueling migration and displacement.

Gender norms and power structures play a critical role in determining how women and men of different backgrounds are impacted by – and respond to – such crises. Pre-existing inequalities, gender-related roles and expectations, and unequal access to resources can deepen inequality and leave some groups disproportionately vulnerable.

In his 2019 Report on Women, Peace and Security, the UN Secretary-General declared an “urgent need” for better analysis of the linkages between climate change and conflict from a gender perspective. Understanding the gender dimensions of climate-related security risks is not only key to avoiding exacerbating vulnerabilities, but also to uncovering new entry points for advancing gender equality, improving climate resilience and sustaining peace.

Case studies, from Egypt, Columbia, the Asia Pacific, Sudan, and other countries, contributed by researchers and practitioners form across the globe illustrate the different ways in which gender, climate change and security are linked. Understanding these linkages can help policymakers, development practitioners and peacebuilders mitigate risks of violence and leverage opportunities to build resilient, inclusive, and peaceful societies.

The report assesses entry points for integrated action and provides recommendations for policymakers, practitioners and donors on advancing three inter-related goals: peace and security, climate action and gender equality. The recommendations include:

  1. Integrate complementary policy agendas
  2. Scale up integrated programming
  3. Increase targeted financing
  4. Expand the evidence base

What 1,000 CEO’s really think about climate change and inequality – HBR

15 Oct 2019

To solve the world’s biggest challenges, such as climate change and inequality, the business community will have to play a critical role. And we need CEOs who understand the challenges and want to drive deep change in how business operates.

A study on CEO attitudes came out to shed  light on how chief executives think about sustainability and other global challenges. The study collects insights from more than 1,000 CEOs. The underlying context for this year’s report is that the world is running out of time on climate change.

The report is worth spending some time with to explore the three “calls to action” they identified: (1) raising ambition and impact in CEO’s own companies, (2) “changing how we collaborate with more honesty about the challenges,”and (3) “defining responsible leadership,” which I read as the CEOs committing personally, as human beings, to change. Some key insights:

  • Business leaders feel pressure to build more sustainable enterprises from key stakeholders. Customers and employees were the top two vote getters when the CEO’s were asked which stakeholders would be most influential on how they manage sustainability.
  • Increased tension among CEOs about the perceived tradeoffs between sustainability and traditional financial metrics.
  • 88% of the CEOs “believe our global economic systems need to refocus on equitable growth.”
  • All of the large company CEOs agree that “sustainability issues are important to the future success of their businesses.” (Funny side note: just 62% of those CEOs would link their pay to sustainability outcomes).
  • Only 21% think business is playing a critical role in contributing to the Global Goals.
  • While 59% say they’re deploying low-carbon and renewable energy, only 44% see a net-zero future for their company in the next decade.